Expat Retirement Planning: How much do you need?

Regrettably, most people do not want to think about the answer. It will be costly. I cannot help that. After all it is what YOU want, not me. But let us think about it.

I assume that people try to play down their needs to me on the assumption that either I will believe them, I will make them save less (as if that is my decision anyway) or will think that they are not worth the time and I will then leave them be. They are kidding only themselves. This is a serious business.

The first issue to consider is your current spending habits and outgoings. When you get to retirement, will you still be paying a mortgage (I hope not) or education fees for your children? Those are big expenditures. Not having to find the money for those will mean that you need less to live on then than you might need at the moment. We must also think about your lifestyle? Do you spend a lot of money on treats or luxuries, do you run three cars when two should be sufficient? The questions go on and on.

Think about this next question very carefully. Do you think you will need more money in retirement than you need now that you are working? Remember that you will have a lot more spare time on your hands. In fact, all day, every day, seven days a week. Do you intend to sit at home in front of the television or do you want to use the time to see the world and get out and live a fulfilling life? It is my belief that most people will want (and need) more money in retirement than whilst working. After all, holidays, cruises, good books, the theatre, fine wine and meals do not come cheaply.

This all needs to be balanced though against what is affordable to the individual. Wanting to live the life of a king but only being able to save £50 each month will lead to a lot of disappointment (I should know, I want to live like a king too!). That brings us back to the main question, ‘How much do you need?’ For, if you live on say £15,000 per year, you probably do not need to retire on £200,000 per year. Certainly, it would be nice though.

Let us do a little theoretical retirement planning.

We shall assume a few things before we start:

1. You wish to retire at age 60.

2. You want to get to retirement age and just live off money held in the bank. It is very low risk, you do not have to manage the funds, just withdraw the income (the interest paid).

3. That you want an income (forget taxation for the time being, that just complicates this) of £30,000 per annum. (An income that is above the current UK average wage now in 2011/12 but won’t be in twenty years time and probably won’t be a particularly big sum either by then).

4. That you are earning 3% interest on your money. (Who knows what interest rates will be then, but this rate is a reasonable guide now. Of course, as interest rates change, so does the amount that you will need to save.)

5. You have no other retirement savings in place.

How big a ‘pension pot’ will you need to have somehow invested to get this income at age 60? Have three guesses. No cheating. No calculators.

Ok. So it is a simple sum and you got it quickly at the first attempt. But yes, that is correct, the answer is a million pounds (that is £1,000,000). That is a win on the lottery or the football pools. It is a lot of money. But, £30,000 really is not that big an income. In the grand scheme of things, it is not huge. Sure, it might be more than you are making right now and that will be the case for a lot of people in the UK, but huge, it isn’t.

So you won’t need that. Fair enough. Halve it. Will you need £15,000 per year? I think the answer to that question for most people is a resounding ‘Yes’. That means a pot of half a million will be required. That is still a big sum of money. Hang on though. If you work for forty years and earn £15,000 each year, in total you would have earned £600,000. How on earth do you manage to save a sum like that?

Therein lies the problem that the entire pension industry has. Where on earth can the money come from? Governments and corporations are all saying ‘not me’. It is hard to blame them for not wanting to foot the bill when such a large amount of money is required.

To help you out though, it is likely that the state will provide ‘something’ at retirement in the UK. What that may be in the future, who can say? Yet, realistically, their current target is that everyone should have at least £100 (for the individual) or £150 (per couple) to live on each week. If you were to retire next week, mortgage paid, what sort of standard of living would you have on £100 each week? Pay your bills and council tax, buy some food, and the occasional book. Can you afford to run your car? I didn’t think so. The government then, will keep you from dying through starvation, but what else?

If we assume that you actually do require the £15,000 I mentioned earlier, what will the impact of the state pension be? By lowering your requirement by £5,000 each year, we are able to lower the size of bank balance from which you need to live. If we still assume you earn a 3% interest rate on your money, you now need a bank balance of somewhere around the £330 to £340 thousand area. These figures are still far larger than the average man on the street has tucked away. More achievable certainly, but far more than the average guy has.

This, as I am sure you are now realising, will take a lot of commitment to save. Twenty five pounds each month will not get you there (as much as we all would like). In fact, the amount you need to save each month depends very heavily on the age you wish to retire at and the number of years until that date. As an example, to hit a target of £340,000 (as I mentioned above) in twenty years time would require savings of around £1250 each month. Now do you realise just how seriously you need to be taking your retirement planning? Even with a thirty year savings term, you would need to be putting aside in the region of £800 each month.

What if you need to aim for that one million pounds figure instead? In late 2001, one of the companies that dominate the International market released figures highlighting the costs of full retirement planning. The target being aimed for is one million pounds and they detailed the amount required to save that figure in 10, 20 and 30 year’s time. They also assumed that the funds grew at an average of just 5% compounded each year. Bear in mind that being in the International market, tax is not an issue (there is no tax relief on any contributions and the funds are not taxed whilst invested) so these are just about the true figures that would need to be saved each month by you the investor.

Savings Term / Amount Required Monthly

30 years / £1,349
20 years / £2,640
10 years / £6,981

Did that scare you? That is a lot of money. Nearly £7,000 each month is, I am sure, out of the reach of almost everyone in Britain as you would need to pay £83,772 each year just in pension contributions. How many people do you know that can do that?

If you can see anything from the numbers above, it must surely be that the key is to START EARLY. The sooner that you start saving, the more monthly pay cheques will be available to be used. On top of that, a large proportion of the money that you save each month and year can (and should) be invested to grow. The more years you have in which to save, the longer the money can grow and therefore less saving by you should (and shall) be required. The more you can save at an early age, the better off your retirement will be.

However, this brings us to another of those paradoxical situations in retirement planning. When you need to be doing the most saving towards retirement (in your twenties) it is usually the last thing that any of us wish to do.

A recent survey (October 2010) by the National Consumer Council, revealed that 1 in 3 people aged 30 or under are making no savings towards their retirement at all. It seems that these people are all mistrustful of the government system, the savings industry and company schemes. So, to ensure that their lack of trust is fully appreciated, they are just abstaining. This is the generation that is having a family later in life and so will not be in a position to save hard for the next fifteen to twenty years either. Currently, they choose not to, soon they will be financially unable. The thought of a third of all pensioners having no nest egg at all when I get to retirement age is scary. The government of the day will be forced to help them. Who will pay?

This, of course is only half of the battle. For this generation, that has 1 person in 3 doing nothing, almost certainly has the other 2 people doing far less than they need too! In forty or so year’s time, this generation (my generation!) will have almost no pension provision. The government will be required to support FULLY almost everyone.

This is being combined with an exodus from the developed nations of our truly talented and wealthy people. They can see what is coming in the future and can also see that governments will have to extract the money needed from somewhere. This money will come from higher taxation. For this reason, the prices of residential property in tax havens are soaring. Many of the truly wealthy have already left their home nations.

It will, however, leave Europe with a taxpayer imbalance. As the governments give away more and more money they need to tax productive people with increasingly higher rates. The major nations will find themselves left with populations that largely receive state handouts for pensions, housing, child support payments, disability allowances and unemployment benefits whilst thoughtful citizens with money, good advice and motivation will find another ‘provider’.

I use the term ‘provider’ with care. Taxation, is not a monopoly because there are hundreds of other competitors. Whilst you or I live in the UK, we have to pay UK taxes. If, however, we move to (lets pick a nation) France, the French government will want to tax us. You can compare the tax rates (as well as all the other lifestyle and employment factors) and make a decision. But, if you have ‘significant’ wealth, why not choose Bermuda, the Bahamas or Belize? You will still be paying tax somewhere, it just might be at a rate that is 20 or 30% cheaper!

This will leave governments with a difficult Catch 22 type decision. They need to tax individuals more heavily, but the more they tax, the more people leave. This, in turn, causes tax rates to need even bigger increases forcing more people to leave.

The governments of the future will find that they are stuck between a rock and a very, very hard place. Alas, there are no magic wands and I don’t propose to have the right answer. In truth, I am not even sure I know what the right question is! If it were that easy, there would be no problem.

All of the above was related to the UK, for the simple reason that I have read far more about the UK pension problems than elsewhere. But, that does not mean that there are no pension shortfalls in other developed countries, far from it.

President George W. Bush is currently trying to find a route to solve the coming disaster in America when the ‘Baby Boomers’ start retiring in about 2011. Whether he finds a solution or not, we must at least give him credit for trying to hold a very difficult debate.